Securities Transaction Tax (STT)- Features, Tax Rate & Applicability

It is quite common for taxpayers to resort to tax evading measures to save their tax outflow to the Government. It is necessary for the Government to keep a tab on such measures by having provisions in law or introduce new provisions / modify the existing ones in order to curb this practice.

When people started evading tax on capital gains by not declaring their profits on the sale of stocks, the Finance Act, way back in 2004, introduced a tax called the Securities Transaction Tax (STT) as a means of clean and efficient way of collecting taxes from financial market transactions.

What is Securities Transaction Tax?

STT is a kind of financial transaction tax which is similar to tax collected at source (TCS). STT is a direct tax levied on every purchase and sale of securities that are listed on the recognized stock exchanges in India. STT is governed by Securities Transaction Tax Act (STT Act) and STT Act has specifically listed down various taxable securities transaction i.e., transaction on which STT is leviable.

Taxable securities include equity, derivatives, unit of equity oriented mutual fund. It also includes unlisted shares sold under an offer for sale to the public included in IPO and where such shares are subsequently listed in stock exchanges. STT is an amount to be paid over and above transaction value and hence, increases transaction value.

As already mentioned STT is leviable on taxable securities transaction. STT Act has also provided for value of transaction on which STT is required to be paid and person who is responsible to pay STT i.e., either buyer or seller. However, rate of STT will be decided by Government and modified from time to time if necessary.

Provisions of collection of STT works similar to TCS or TDS. STT is required to be collected by a recognised stock exchange or by the prescribed person in the case of every mutual fund or the lead merchant banker in the case of an initial public offer, as the case may be, and subsequently payable to the Government on or before the 7th of the following month. In case the above persons fail to collect the taxes, they are still obliged the discharge an equivalent amount of tax to the credit of Central Government within 7th of the following month. Further, failure to collect or, remit whatever has been collected will result in levy of interest and penal consequences too.

Features of Securities Transaction Tax

STT is a straightforward direct tax that is simple to compute and impose. Some of STT's most distinguishing characteristics are given below.

1. An STT charge is applied on all sell transactions for options and futures.
2. Each future trade is valued at the actual traded price for the purposes of STT computation, whereas each option trade is valued at the premium.
3. The amount of STT that a clearing member must pay is the aggregate of all STT taxes owed by trading members under him.

Securities on which STT is Applicable

While the term ‘securities’ is not defined under STT Act, STT Act specifically allows borrowing of definition of such terms not defined in STT Act but defined in Securities Contracts (Regulation) Act, 1956 or Income-tax Act, 1961. The term ‘Securities’ is defined in Securities Contracts (Regulation) Act and includes the following:

• Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate.
• Derivatives.
• Units or any other instrument issued by any collective investment scheme to the investors in such schemes.
• Government securities of equity nature.
• Equity oriented units of mutual fund.
• Rights or interest in securities.
• Securitized debt instruments.

Hence, securities include all of the above the purpose of STT levy that are traded on recognized stock exchange. Off-market transactions are out of the purview of STT.

Levy of Securities Transaction Tax in India

* Please refer Rule 3 of Securities Transaction Tax Rules, 2004 for the manner of determining value of taxable equity or Equity oriented mutual fund transactions.

STT on a physical delivery of Derivatives – CBDT clarification dated 27 August 2018

Derivative contracts are generally settled in cash which means, stocks are not physically delivered and only the profits are paid and received by the contracting parties. These transactions, as given in the table above, are subject to an STT levy of 0.001 percent. However, SEBI had in its Circular dated 11.4.2018 listed around 46 stocks, in respect of which derivative contracts would be settled by way of physical delivery of shares as against cash.  However, no clarity emerged on the rate of STT that would apply to these kinds of transactions.

Further, for such transactions, the stock exchanges began to levy an STT of 0.1 percent (this is the rate of STT for delivery based equity share transaction), which is almost 10 times of what is levied for derivative contracts settled in cash. Hence, a petition was lodged by the Association of National Exchange Members of India (ANMI) against the stock exchanges before the Bombay High Court to address the aforementioned concern of levy of 0.1 percent of STT on physical delivery of derivatives.

The High Court has sought the comments of the Central Board of Direct Taxes (CBDT) in this regard. The CBDT, in response, has issued a clarification dated 27 August 2018, where it has observed that where a derivative contract is being settled by physical delivery of shares, such transaction would be similar to a transaction in equity shares where the contract is settled by actual delivery of shares. Therefore, the STT rate as applicable to delivery based equity transactions would apply to such derivative transactions too.

Securities Transaction Tax and Income Tax

Tax on capital gains

When STT levy was introduced in 2004, simultaneously new Section 10(38) was introduced to benefit taxpayers who would incur STT. As per income tax aw, for transactions undertaken until 31 March 2018, any capital gain on sale of shares or equity oriented mutual fund units (EOMF) which are subject to STT is taxed at beneficial/Nil rate.

While long term capital gain (if shares or EOMF are held for > 12 months) are exempt from tax, short term capital gain on such securities are taxed at concessional rate of 15%. However, in order to prevent abuse of exemption provisions by certain persons for declaring their unaccounted income as exempt long-term capital gains by entering into sham transactions, Finance budget 2018 proposed to withdraw the exemption on long term capital gain and tax long term capital gains on equity shares and EOMF at concessional rate of 10% with respect to transfer effected on or after 1 April 2018.

However, gains accrued till 31 January 2018 are grandfathered i.e., in case of transfers upto 31 January 2018, cost of acquisition of shares or EOMF acquired before 1 February 2018 will be replaced by fair market value as on 31st January 2018.

Tax on business income

In case of person who is trading in securities and offering income/loss from such trading as business income, STT paid is allowed to be deducted as business expense.

When is Securities Transaction Tax Levied?

Each purchase and sale of shares listed on a domestic and recognised stock market is subject to a securities transaction tax. The government determines the taxation rate. Under the STT act, all stock market transactions involving equities or equity derivatives such as futures and options are subject to taxation. When a share transaction is completed, STT is levied. As a result, STT is quick, transparent, and effective. Because the tax is imposed as soon as the transaction occurs, incidents of non-payment, incorrect payment, and so on are minimised to a bare minimum. However, the net effect is that it raises the cost of the transactions.

STT Exmaple

Assume a dealer purchases 500 shares worth Rs.10,000 at Rs.20 per share and sells them at Rs.30 per share. If the trader sells the shares on the same day, the intraday STT rate of 0.025% will apply.

As a result, STT = 0.025*30*500 = Rs.375.

Similarly, the appropriate STT for futures and options is 0.01%. If a trader buys 5 lots of Nifty futures at Rs.5,000 and sells them at Rs.5,010, the STT is calculated as follows:

STT = 0.01*5010*50*5 = Rs.125.25

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